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MarketWatch First Take: Nvidia’s deal for ARM is dead — how long until CEO Jensen Huang admits it?

The Federal Trade Commission drove a nail into the coffin of Nvidia Corp.’s proposed $40 billion acquisition of Arm Holdings Plc., but Nvidia’s headstrong chief executive is unlikely to accept its fate.

The FTC announced it had filed a lawsuit against Nvidia
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to block the deal on Thursday, saying its completion “would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals.” The deal — the largest in semiconductor history — was already under scrutiny in Arm’s home country, the U.K., as well as by European Union regulators, and Nvidia had been pushing back the timeline for approval while dealing with several different agencies worldwide.

“Nobody thinks this is going to close,” Bernstein Research analyst Stacy Rasgon told MarketWatch on Thursday. “The stock didn’t even bobble when the news came out.”

Indeed, Nvidia shares were up about 2% when the FTC announced its suit late in the trading session, and shares closed with a 2.2% gain. While analysts were optimistic about the potential of the deal to bring a major competitive force to the data center — where Intel Corp.’s
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dominant position has only recently been challenged by Advanced Micro Devices Inc.
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— they have predicted regulatory pushback since the deal was struck in September 2020.

Arm, currently owned by Softbank Group Corp.
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of Japan, is a chip designer and licenses its designs for low-powered processors that currently dominate the mobile phone market. ARM designs have made slower progress is getting into the data-center and corporate server markets, which is where Nvidia sees a huge opportunity for ARM processors, in combination with its graphics processors.

Competitors and regulators, though, voiced concerns about Nvidia owning an entity that contracts with its competitors in the chip space. A host of rivals have reportedly complained to government regulators around the world, including Alphabet Inc.’s
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Google, Microsoft Corp.
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and communications chip designer Qualcomm Inc.
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Software developers, chip designers and server makers are nervous that Nvidia would have access to their product plans and roadmaps if they continued to license designs from ARM. The FTC’s complaint is not yet publicly available, but a spokeswoman said the agency alleges that “the combined firm would have the means and incentive to stifle innovative next-generation technologies, including those used to run data centers and driver-assistance systems in cars.” 

With all of that standing in the way, investors are not betting on Nvidia owning Arm. Any who were likely gave up after Nvidia’s earnings call last month, when company executives — who had been predicting that the mega-merger would eventually close — did not voice the same certainty.

“This quarter they did not offer such an optimistic outlook,” Christopher Rolland, a Susquehanna Financial Group analyst, wrote in a note last month.

But analysts are not that concerned about the deal falling through, as they expect that Nvidia can accomplish just as much by continuing to work with Arm as a customer as it could if it owned the firm, only with smaller rewards. Nvidia wants to own the company so that it can invest in creating a software ecosystem to encourage developers to write for ARM-based products in the data center. Nvidia has shown it has the industry leadership and funds to create such an ecosystem with its CUDA software development platform for its GPUs.

“They can definitely do (near) as much by licensing ARM server IP [intellectual property], but they would not capture all the same economics,’” Susquehanna’s Rolland said in an email to MarketWatch on Thursday.

With all of Wall Street expecting the deal to fall through, and regulators standing in the way, the biggest question is how long Nvidia Chief Executive Jensen Huang will continue to fight for the deal. The FTC set an administrative trial for August 2022, just a month before a deadline that will allow SoftBank to keep a $1.25 billion down payment as a breakup fee, as Nvidia confirmed to MarketWatch last summer.

Will Nvidia keep fighting through next summer to try to avoid losing that fee, despite the long odds of defeating the FTC, not to mention the other regulators who are expected to stand in the way?

“It’s like eight weeks of free cash flow, so who cares,” Rasgon said, referring to the breakup fee. Rasgon said he expects Huang will continue to fight, based on his vocal determination to get the deal done.

“Jensen is not known for backing down,” he said.

In this case, Huang’s legendary stubbornness may end up costing Nvidia even more in legal fees and time. It looks like the outcome is already determined, and Nvidia is not going to own Arm. Nvidia should instead begin working on its own solutions to help Arm further penetrate the data center, instead of fighting a losing battle.

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